Technical: Divorce Bill, financial planning and the silver divorcee
12 April 2018
Clare Moffat, senior technical manager, Prudential, looks at the divorce (Financial Provision) Bill and how it may affect clients’ financial plans and in particular, the ‘silver’ divorcee.
The Divorce (Financial Provision) Bill passed through its second reading in the House of Lords in January 2017. No date has yet been set for Committee stage but what impact might this Bill have especially in relation to financial advice? It has been said that this is attempting to bring the law in England and Wales closer to that of Scotland. Is this actually true?
One of the main impacts of the Bill is in relation to the definition of matrimonial property. This is a fundamental change and is more in alignment with Scots Law. The Bill states;
“matrimonial property” means all property and interests in
property, including any pension rights, which could be the subject of a pension
sharing order or a pension compensation sharing order, belonging to the
parties or either of them at the date of the relevant financial order which—
(a) was acquired—
(i) during the marriage; and
(ii) otherwise than by gift, inheritance or succession from a third
(b) does not directly or indirectly represent property acquired by them or
either of them before the marriage.”.
Currently someone in England and Wales could marry in their late 50s, having accrued a large pension and a significant amount of property but then divorce after a 5 or 6 years. However, the ex-spouse could make a claim on the pension and property from before the time of the marriage. The law is unclear though and much has been decided by case law. In the case of Miller v MacFarlane(2006), it was stated that in the case of a short marriage “fairness may well require that the claimant should not be entitled to a share of the other’s non-matrimonial property. The source of the asset may be a good reason for departure from equality.” What is a short marriage though? Less than five years? Less than two years?
The problem with the silver divorcee
Pension sharing orders were previously not used very often. Instead couples normally used offsetting. The pension owning spouse could try to keep the pension and perhaps give up the house. However, with the increase in DB transfers, there has been an accompanying increase in the amount of pension sharing orders. If the transfer value is £1 million then not many people have assets which can be offset against that. The only option might be a pension sharing order.
However, with the rise in divorce in the over 55 age group, there might not only be the splitting of assets after a long first marriage but also a second marriage. This could be much shorter but as the law stands currently in England and Wales, some of the same (reduced) assets could be considered again.
The Bill should make the position clearer in relation to inherited drawdown plans as well. Post freedoms the question has been asked about what happens on divorce. For example, the member dies expressing a wish that their adult child benefits from their pension fund. The child chooses to receive the benefits as nominees drawdown. That child is married and extracts money from the fund on an annual basis to pay for a holiday. However, the marriage breaks down and all the assets are considered. This could currently be classed as matrimonial property as it is being used for the family. However, the difficulty is that there cannot be a pension sharing order on dependents/nominees or successors drawdown which could mean that other assets need to be offset against the drawdown fund to equalise the assets.
Pre or post nuptial agreements
The Bill also allows for pre or post nuptial agreements to be binding rather than persuasive as they currently are in England and Wales. In Scotland these contracts are usually enforceable, except in certain circumstances. However, they are just part of the divorce proceedings story. The Bill proposes going one step further as they will be binding except in certain circumstances such as when there was no independent legal advice, there is not full disclosure and it was less than 21 days before the marriage.
Again, this can often be an issue for those who marry late in life and have built up a large business and other assets. They may want to protect particular assets and although English case law states that a pre-nuptial agreement is a good guide, it isn’t presently binding.
What can you do to help clients now?
If you are an adviser firm based in England then this is currently an issue for your clients. The Bill may never become law. So what can you do to help?
If you have clients who are business owners and thinking about marrying later in life, then it is a good idea to explain what the current law says. They may want to think about a pre-nuptial.
Although not binding, it is a guide. Suggest that they both consult a solicitor so both parties know what the implications are if they split up. Although it isn’t very romantic – it could be worthwhile in the long term.
Planning is even more essential if you have clients with large pension funds who are concerned about passing on their pensions wealth to married children but they are worried that the marriage might fail. Presently the only way to make sure that this would not be a matrimonial asset would be to go down the spousal bypass trust route instead of expressing a wish in favour of the adult child. Instead of the death benefits passing to the adult child, the trustees will be responsible.
A change to the divorce laws in England and Wales is necessary as the current laws are 45 years old. Things have changed and divorce is more common. The rise of the silver divorcee brings lots of issue for your clients, who are inevitably the group in society with the largest assets. Knowledge of how the system works is essential.